Day: July 16, 2015

Netanyahu v Hammond

This is about as good an exchange as you are going to find on the Iran nuclear deal:

From my point of view, it is telling that Netanyahu says absolutely nothing about how multilateral sanctions, international inspections and technological constraints on Iran’s nuclear program would be maintained in the absence of a deal. He simply repeats that he wants maintenance of sanctions and a better deal, one that somehow ends burning of Israeli flags in Tehran as well as other odious Iranian behavior. I’d like a pony too.

Note also: Netanyahu suggests North Korea developed its nuclear weapons while under IAEA monitoring. That is not really true. Pyongyang ejected the inspectors and withdrew from the Non-Proliferation Treaty (NPT) in 2003. It first tested a nuclear weapon in 2006. Of course Iran could also withdraw from the NPT, but the agreement reached this week includes the following sentence:

Iran reaffirms that under no circumstances will Iran ever seek, develop or acquire any nuclear weapons.

You can believe it or not, but it certainly goes beyond previous commitments Iran has made in writing.

I’d score this bout a win for Hammond, but admittedly that is the direction in which I lean. There simply is no good alternative to an agreement. Whether this one is the best we could get or not, it is now the only one available. Netanyahu and other opponents will soon be screeching about the need to implement it to the letter and complaining about every conceivable Iranian deviation.

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Tunisia needs more help

On Tuesday, the House of Representatives Subcommittee on the Middle East and North Africa hosted a hearing on Tunisia’s Fragile Democratic Transition.  Opening statements were given by Ileana Ros-Lehtinen, Chairman of the subcommittee, Theodore Deutch, Ranking Member of the subcommittee, and Steve Chabot, member of the committee. Testimony was provided by Ambassador Mark Green, President of IRI, Leslie Campbell, Senior Associate and Regional Director at NDI, Aaron Zelin, Richard Borow Fellow, WINEP, and William Sweeney President and CEO, IFES.

Ros-Lehtinen stated that Tunisia is the only country that has made positive gains after the Arab Spring, but these gains are uncertain.  Despite its new constitution and elections, Tunisia has been the victim of two recent high-profile terror attacks.  The attacks remind us that tourism accounts for 15% of Tunisia’s GDP.  Even before the Sousse attack, economic problems in Europe were hurting Tunisia’s tourism.

President Essebsi has claimed that another attack would cause the collapse of Tunisia’s government.  The stability of Tunisia and its democratic transition is in the US’s interest.  The designation of Tunisia as a major non-NATO ally last week was an important step.  But Tunisia is home to the largest contingent of foreign fighters in Iraq and Syria, and returnees from these conflicts pose a threat.  The US needs to help Tunisia strengthen its institutions and invest in its future.

Deutch hailed the peaceful transfer of power after Tunisia’s 2014 parliamentary elections and the ability of its parties to form coalitions. However, Tunisia’s economy has struggled since the revolution.  Unemployment is at 15%, and among working-class youth is nearly triple that figure.  Tourism has struggled especially after recent attacks.  There are home-grown terror cells, external threats from Libya and Algeria, and the threat of returnees from Iraq and Syria.  Tunisia’s government must not sacrifice freedom in the name of security.  He praised the designation of Tunisia as a major non-NATO ally, as well as the MOU signed in May.

11753820_10153473641973011_327306531_nChabot echoed the statements of Ros-Lehtinen and Deutch concerning Tunisia’s potential to serve as a model and the terror threat.  He also expressed concern that Monday’s disappearance of 33 Tunisian citizens on the border with Libya indicates radicalization in that area.

Ambassador Green also affirmed that Tunisia is the brightest hope for democracy in the Middle East and North Africa.  The 2014 elections showed that Tunisia’s stakeholders are committed to democracy in a polarized, unstable region.  The US administration must train and help reform Tunisia’s security services, which are a holdover from the Ben-Ali regime.

Unemployment weighs most heavily on young Tunisians.  Since 2014, IRI has supported decentralization.  Tunisia’s bureaucracy stifles entrepreneurship and foreign investment.  Tunisia’s government cannot put off economic reform despite pressing security concerns.

Low youth voter participation is another major concern.  Civil society groups are necessary to involve youth and connect them to the democratic transition.  The US needs to focus more of its aid on supporting democratic governance.  Tunisia will likely hold elections in 2016, so the time to foster genuine democratic competition is now.

Campbell several factors that differentiate Tunisia from other Arab countries:

  1. Tunisia took time to develop its constitution rather than rush to snap elections.
  2. The military stayed out of politics.
  3. Civil society was allowed to flourish.
  4. Tunisia’s political establishment avoided polarizing rhetoric and sought compromise.

Tunisia’s Islamists defied expectations and peacefully transferred power. The situation in Egypt, international pressure, and popular pressure made them respect the democratic process.  NDI helped create space for political debate and the parties’ investments in their internal structures have strengthened the democratic process.  Campbell cited the balance between freedom and security as a major challenge.

Tunisia does not appear as corrupt as some other countries but there is crony capitalism controlled by privileged families.  If you’re not from the right family or region, there is no way to get ahead.  It is important to foster a meritocracy.  Business leaders want access to capital and want to join international organizations, but there is a sense that crony capitalists are circling the wagons under the current government.

Zelin stated that there have been 11 known attacks by Al Qaeda in the Islamic Maghreb (AQIM) and ISIS since the last election, as well as 10 counter-insurgency operations by the Tunisian military.  The US has provided a lot of assistance.  Tunisia’s jihadi problem has been present for approximately 20 years, but is coming to the surface now because many exiled radicals returned to Tunisia in 2011.

From 2003-2011, many individuals falsely accused of being terrorists were imprisoned, only to be radicalized in prison.  If Tunisia’s current security bill is passed, we could see a repeat of this.  The Ministry of Interior is corrupt and many of the bad practices of the Ben-Ali regime are returning, including possible torture in prisons and arbitrary arrests.  These are possible sources of radicalization.  The police require retraining and capacity building so they can be seen as protectors, not a group that takes away rights.

The government has had difficulty transparently investigating terrorist attacks and communicating the results to the people.  President Essebsi’s comment that the government would collapse following another attack was irresponsible and amateurish.

Tunisia has reinforced its border with Libya and is considering a border fence.  However, there are individuals with weapons already inside Tunisia and others who come from Algeria.

Sweeny stated that only 16% of American aid to Tunisia goes toward strengthening democracy. More can be done.  Prior to the 2016 elections several things are necessary:

  1. A standard legal framework for local elections.
  2. Greater professionalism from the electoral commission and capacity-building in its regional offices.
  3. Implementation of lessons learned from 2014.
  4. Focus on unemployed youth, for whom dictatorship and democracy remain much the same.

Sweeny agreed with Campbell’s observations about crony capitalism, and stated that it will hinder foreign investment.  Foreign investment will also be constrained by a lack of confidence in Tunisia’s stability.


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Global implications of the oil price crash

The steep decline in oil prices has been one of the most significant global economic developments over the past year. On Tuesday, the Carnegie Endowment held an event on “Oil Price Trends and Global Implications” to address the consequences. The panelists included Aasim M. Husain, Deputy Director in the Middle East and Central Asia Department of the IMF and Chair of the IMF Interdepartmental Oil Group, Uri Dadush, Senior Associate at the Carnegie Endowment and Mark Finley, General Manager for Global Energy Markets and US Economics at BP. The event was moderated by Michele Dunne, Senior Associate in Carnegie’s Middle East Program.

Husain assessed that the drop in oil prices will persist in the medium-term. Initially, when oil prices fell, futures prices did not fall with spot prices. Instead, spot prices fell around mid-year while futures prices started to fall in October. Markets expect some recovery of spot prices, but because of decline in long-term oil prices, the recovery will not be full—oil prices will not go back to $90-$100 per barrel, but they can go back to $70-$75 per barrel. Futures prices are predicted to remain in the $40-$100 range.

The drop in price was a result of decrease in demand as well as increase in supply. Unlike in 1986, when Saudi Arabia’s sudden increase in supply crashed oil prices, in 2014 the world experienced the shale gas revolution, lower extraction costs for oil and lower demand. Basically, a combination of factors led to the oil price crash, although supply factors played a larger role.

Unsurprisingly, “pass-through”—the change in oil price passed on to consumers—was minimal worldwide. Since many countries regulate or fix petroleum prices, consumers did not get the entire benefit of the oil price decline. The biggest pass-throughs were in Europe at 80% and in North America at 50%. Husain claimed that if oil prices were fully passed through, global growth would increase by 1% in a year.

The beneficiaries of the low oil prices have been governments and state-owned enterprises. What they do with revenue determines the consequences of the oil price shock. Some may increase government spending, while others may save more. The losers have been oil-producing countries that are receiving lower oil revenues and therefore have less to invest in global financial markets. Fortunately, many of these countries have accumulated large buffers that will give them time to make adjustments to the price decline.

Finley attributes lower oil prices mainly to changes in supply. In 2014, global consumption was in line with the long-term historical average, but supply was exceptionally strong—global oil production grew at almost twice the historical rate. All the net growth came from outside the OPEC countries, with the US shale gas revolution leading the way. In 2014, the US surpassed Saudi Arabia and Russia to become the world’s largest oil producer since 1985. Both Canada and Brazil also saw record increases in oil production and achieved all-time record levels on average in 2014. Global demand and non-OPEC production have begun to respond to lower oil prices, but the substantial increase in oil production means that the market remains significantly oversupplied.

Like Husain, Finley believes the persistent decrease in oil prices will continue through the medium-term. However, one must keep in mind ongoing supply disruptions in the Middle East and North Africa. Finley warned that any policy must be robust across a range of prices or be able to adapt to significant and unexpected price changes in the future.

Dadush believes oil price shocks stimulate economic activity in the short-run by redistributing income towards people who consume more with a high propensity to consume. But this effect lasts only so long. There will be—and already are—significant cutbacks in energy investment. Oil is only 2% of the world GDP when one looks at production, so an oil price change even by 50% doesn’t have a huge stimulatory effect on world supply. This means the stimulus from the oil shock is short-lived even if there is high pass-through.

With regard to the Iranian nuclear deal, the panelists agreed that the return of Iranian oil will increase supply, but it is unclear by how much because of uncertainty about Iran’s capabilities and the response of other OPEC producers. Any volume of incremental Iranian production would simply add to an already oversupplied market.

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